SAMUELSON: Delusional mindset led to Great Depression

Unhappy birthday. Five years since the collapse of Lehman Brothers, we still lack a true understanding of what caused the financial crisis and Great Recession. Oh, there are standard stories from left and right. Liberals blame a naive faith in free markets, deregulation and Wall Street greed. Conservatives slam government: lax monetary policy and ruinous home-lending by Fannie and Freddie. These narratives are self-serving, and don't illuminate the messier reality.

We were victims of success. The crisis originated in 25 years of prosperity, from roughly the end of 1982 to the end of 2007. This conditioned almost everyone to take stable growth for granted. The longer the prosperity continued, the more it inspired the risky behaviors that ultimately wrecked the economy. These included over-borrowing by consumers and financial institutions, housing speculation and loose regulation. The "causes" cited by left and right were usually the consequences of a delusional mindset: a belief that once-risky practices were prudent in a world of near-perpetual prosperity.

Recall the crucible of this thinking. From 1982 to 2007, the United States suffered only two slight recessions. Gross domestic product adjusted for inflation - the economy's output - was 125 percent higher in 2007 than in 1982. From 1990 to 2007, unemployment averaged 5.4 percent. Inflation was controlled. Despite the burst "tech bubble" in 2000, stock prices in 2007 were 15 times higher than in 1982. The Federal Reserve seemed capable of preventing financial crises from becoming deep recessions.

The accumulating evidence suggests that false ideas, not evil people, were the main culprits. Take the popular notion that banks and investment banks ("Wall Street") knowingly packaged bad home mortgages in securities that were then sold to unsuspecting investors. The bankers, the story goes, understood that there was a housing bubble - that prices would crash and defaults explode - but peddled bad loans because it made them rich. This was the exception, not the rule.

A study published by the National Bureau of Economic Research found that the bankers showed little "awareness of a housing bubble and impending crash."

What explains their lapse? Probably this: Before the real estate collapse, there was a widespread belief that housing prices would rise indefinitely, preventing (by definition) a bubble. We now know this belief was mistaken, stupid and suicidal. But for many, it was genuine.

All this is more than ancient history. It matters for two reasons:

One is to understand whether the economy will improve. Well, they've de-leveraged considerably. Debt payments as a share of disposable income are at their lowest levels since the early 1980s, says the Fed. Still, the economy barely limps along. The problem transcends debt. The disillusion with the pre-crisis euphoria has led to an opposite post-crisis reaction.

The second reason to re-examine the crisis involves policy. The "scoundrel" theory of causation suggests that, once defects in the economic system are identified, they can be rectified with "reforms." The Dodd-Frank financial legislation reflects this philosophy.

The true history of the crisis raises a larger problem. Success in stabilizing the economy in the short run fostered greater long-run instability. What are the limits to stabilization policy? Might more short-term upsets minimize long-term calamities? Economists should be wrestling with these and other hard questions. They aren't.

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SAMUELSON: Delusional mindset led to Great Depression

Unhappy birthday. Five years since the collapse of Lehman Brothers, we still lack a true understanding of what caused the financial crisis and Great Recession. Oh, there are standard stories from

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